CFTC proposes swap status for event contracts while excluding sportsbook wagers

The Commodity Futures Trading Commission has issued a two-part rule package that draws a formal line between prediction-market contracts and conventional gambling. One measure proposes to classify contracts tied to sports, politics, cultural events and weather as swaps; the other immediately excludes casino-style gambling products, including sportsbook wagers and casino games, from that definition.

The interim final exclusion rule, RIN 3038-AF81, became effective when published in the Federal Register. Both measures allow 30 days for written public comments following Federal Register publication.

As reported Sept. 28, the CFTC had sent the two measures to the White House for review before their Oct. 9 release. The package seeks to remove ambiguity over where federal derivatives oversight ends and state and Tribal casino-gambling jurisdiction begins.

The agency argues that event contracts are financial instruments commonly known as swaps. Its proposal relies on the Commodity Exchange Act definition covering transactions whose payments or deliveries depend on an event with a potential financial, economic or commercial consequence. It says sports, political, cultural and weather events may qualify as commodities on that basis.

CFTC Chairman Michael S. Selig said Americans use such contracts to hedge risks, speculate and provide information about future events. The agency has historically overseen event contracts on subjects ranging from property losses and temperature volatility to legislation and corporate mergers, and allowed Iowa Electronic Markets to list election-related contracts under a 1993 no-action letter.

The exclusion rule is meant to ensure that the agency’s position on event contracts does not bring ordinary casino betting within its remit. “Casino-style gambling products are not derivatives,” Selig said. The CFTC said the paired rules support its claim of exclusive jurisdiction over prediction markets while preserving state and Tribal authority over conventional gambling.

That distinction is central to a widening legal dispute involving Kalshi, a CFTC-registered designated contract market offering contracts on sporting outcomes. Courts and states have challenged whether sports-event contracts are swaps and whether federal law displaces state gambling restrictions.

The Sixth Circuit rejected Kalshi’s attempt to block Ohio and Tennessee from enforcing their gambling laws on Sept. 25. It held that an event must be inherently associated with a financial consequence, rather than merely have an attenuated downstream financial effect, for the relevant contracts to qualify as swaps. It also ruled that the Commodity Exchange Act would not pre-empt state gambling laws even if the contracts were swaps.

That ruling deepened a circuit split. The Third Circuit had found Kalshi’s sports contracts probably were swaps and that federal law probably barred New Jersey’s enforcement action, while the Ninth Circuit declined to stop Nevada’s enforcement. The National Law Review described the resulting Third, Ninth and Sixth Circuit decisions as a 2-1 split against Kalshi on the swap question, with the Fourth Circuit still to rule.

The CFTC’s action does not itself settle whether states may enforce gambling laws against event contracts traded on federally regulated exchanges. New Jersey has asked the Supreme Court to review the Third Circuit decision, while the NFL has supported its petition. Robinhood and Kalshi support exclusive federal oversight, whereas the NFL backs state regulation of sports-related contracts.

The stakes are substantial because sports contracts accounted for $1.2 billion, or 80%, of August event-contract trading volume, according to figures reported by Finance Magnates. At least seven CFTC-registered exchanges offered sports contracts as of Sept. 1.

Jaret Seiberg, a TD Cowen policy analyst, said the interim rule appeared designed to strengthen the CFTC’s court position by answering the contention that its approach would make state- or Tribal-regulated wagering federally illegal. Whether it succeeds, he said, “is a different question.”